Spansion Banks on Old Flash Fading From Memory

Its deal to buy Saifun Semi is a bet on the coming change in memory chips.

SAN FRANCISCO -- Spansion ( SPSN) has long lived in the low-rent district of the flash memory market, making chips for applications with limited growth prospects and sex appeal.

Now the chipmaker believes it has the secret sauce to take over the entire flash market.

At first glance, Spansion's announcement Monday of its plans to acquire Israel's Saifun Semiconductors ( SFUN) for $368 million is a bit of a head-scratcher: Spansion currently licenses Saifun's technology. So the deal, while saving it money on licensing fees, essentially gives Spansion something it already had.

And Saifun has historically had a rough time trying to license its technology to other companies. If Spansion was looking for a way to generate new revenue through intellectual property licensing, it hasn't exactly picked a very hot commodity to peddle.

Saifun's $8.7 million in sales in the most recently ended quarter were down 50% year over year -- after Infineon Technologies ( IFX) opted to cease licensing its technology -- and the company's shares are down 65% in the past 12 months.

This may explain the negative reaction among Spansion shareholders. The stock slipped more than 3% on Monday, and was recently off another 5 cents to $8.04 in Tuesday trading.

But executives at Spansion and Saifun are banking that the flash memory market is on the verge of a major change -- and that the two companies have a much better chance of coming out on top by joining forces.